AnalyticsWeek's balance: Satisfied IMF mission, Groysman’s plan, and struggle with freight trucks
The IMF mission is satisfied with Ukrainian reforms; Prime Minister Groysman presented his plan for the country’s development, while Ukraine’s strategic enterprise, the Odesa Portside Chemical Plant is put up for sale – these are the main economic news of the past week.
Ukraine and its key creditor, the International Monetary Fund, have agreed on a number of measures necessary for the completion of the second review of the Extended Fund Facility program approved by the Fund in March 2015. That’s according to a statement by the IMF mission, which completed its work in Kyiv on May 18.
According to Mission chief Ron van Rooden, Ukraine over the last year has made significant progress in restoring economic stability. "Steadfast implementation of structural and institutional reforms is now critical, said van Rooden. “Unwavering determination in the fight against corruption (is) emerging as a litmus test for the government’s ability to retain broad domestic and international support for its policies."
There was nothing unusual among the IMF recommendations. Ukraine authorities only need to consolidate fiscal and financial stability, ensure the rule of law, as well as reform operations of the majority of state-owned enterprises.
The Finance Ministry confirmed that the parties had agreed on measures required to complete the second review of actions under the EFF. The further algorithm is clear – the agreements must be approved by the IMF management and the Board of Directors of the Fund, after which a decision will be made on granting Ukraine the next tranche. This will happen in July.
According to most experts, the IMF will approve allocation of a $1.7 billion tranche for Ukraine.
The fact that Ukraine set a market price for gas ahead of schedule should play an important role. However, ten bills are yet to be passed. Given the alignment of political forces in the Verkhovna Rada and the absolute lack of political will in the session hall, this mission will be anything but easy for the Ukrainian government. This also jeopardizes further cooperation with the IMF as such.
Another problem is a huge deficit of the Pension Fund. Minister of Social Policy Andriy Reva was open in admitting that this was the central issue of the government’s negotiations with the IMF mission.
"When we had the IMF mission working today, the central issue in the negotiations with the IMF was a question we were asked: how are you going to eliminate the deficit of the Pension Fund?" said Reva.
"Of UAH 260 billion we need annually to pay pensions, the subsidies from the state budget to the Pension Fund amount to UAH 145 billion. This is the worst figure it may possibly be. This is a situation when the pension fund is actually bankrupt in a situation when the very pensions are in fact very, very small," the minister said.
No need to be a rocket scientist to predict: The government will choose the banalest way - to limit early retirement and raise the retirement age for all categories of the population.
The Prime Minister, as promised, presented at a meeting the operational plan of reform for 2016.
Presenting the document, Groysman listed in broad strokes the weak spots of the national economy and outlined the points of growth in 2016. While ministers browsed through the 200-page document, the Prime Minister was saying that the development priorities for Ukraine, according to the plan, will be macroeconomic stability, the fight against corruption and the creation of a favorable business environment.
In particular, to stabilize the macroeconomic situation, the Groysman’s Cabinet offers to reduce the budget deficit from the current 3.7% to 3% in 2017, as well as increase the growth of industrial production by 4% in the medium term against the current 1-2% rate.
The reform of the public finance management system is also envisaged, as well as of the pension system; the implementation of targeted social support and the increase in the average salary.
The Cabinet of Ministers in 2016 plans to introduce an electronic system for registration and receiving subsidies. It also seeks to convert 20 public services into an electronic format.
Groysman said that the entire system of social assistance is subject to reform, as not all of its recipients are really in need. "Among the recipients of social assistance, only 25% of the people are actually poor," said the head of government.
In addition, to the delight of the farmers, the Cabinet proposes to introduce direct targeted support to small farms with a land bank under 500 hectares, as well as allow the sale of the right to lease land and present it as collateral for a loan.
Among other things, Groysman pledged to undertake a thorough reform of the tax system. He noted that the Government intends to simplify the administration of taxes and announced job cuts in the overstaffed Fiscal Service.
Bringing order to and subsequent reequipping of the Ukrainian customs offices is another priority of Groysman’s team.
"We will reinstate order at Ukrainian customs and we will do everything so that the “white" [legal and transparent] importer feels completely comfortable, while "gray" and "black" would sustain losses incompatible with life," said Groysman.
The prime minister also mentioned the issue of the Ukrainian roads, 90% of which are in need of major repairs. To solve this problem, the Government seriously considers the creation of a state road fund as the main source of funding for repairs and construction, as the annual state financing from the budget is not enough.
Groysman promised that the long awaited road fund will finally be established in 2017 despite the fact that the bill which provides for its creation has failed to pass through the Rada session hall.
"And then you'll see that in a few years, with this new approach, the road sector will come to another quality level, although today, it remains in a terrible state," said the prime minister.
Of course, Groysman has not disregarded the issue of Ukraine’s energy independence. He expressed confidence that Ukraine would become totally independent in terms of energy in the medium term, as it has enough resources and capacity to do so.
"Now we are starting a stage of stepping up own gas production. While our colleagues from the previous Cabinet did everything in order to switch from the Russian pipe to the European one, our task is to become a completely energy independent state," he said.
The culmination of the meeting of the Cabinet were the speeches of the co-chairs of the Reform Support Group with the government of Ukraine, Leszek Balcerowicz and Ivan Miklos. The latter emphasized the importance of accelerating reforms, in particular, the privatization.
Mikos emphasized that the state-owned enterprises are one of the biggest sources of corruption in Ukraine. To fight it effectively, the country must boost the privatization process which should be transparent and effective.
Odesa Portside Chemical Plant put up for sale
By the way, a start to a large-scale privatization has already been given. Last week, the Cabinet put up for sale one of the country’s largest chemical manufacturers - Odesa Portside Chemical Plant (OPP). The starting price is more than UAH 13 billion.
Introducing the plant’s privatization plan at a Cabinet meeting, head of the State Property Fund Ihor Bilous said that Ukraine would not allow the company to sell shares to buyers from Russia, as well as companies from the black list of offshore jurisdictions.
Interior Minister Arsen Avakov expressed concern whether the privatization of the OPP can be hindered by the fact that there is a $193 million debt of the company to Ostchem, the company controlled by an odious Ukrainian businessman Dmytro Firtash, for gas delivered in 2013-2014.
But the SPF head hastened to assure that this debt would not block the bidding. Of course, the new owner of the OPP will have to repay this debt. Given this fact, so unpleasant for investors, Bilous said that the starting price of the OPP is formed after the deduction of debts to the structures owned by Firtash.
"The investor, who will come to the plant, will deal with all the company’s economic routine, including debt. No one is hiding this fact. There is no threat to an auction at the moment... There is a clause in the terms of investment that the new owner shall be obliged to pay all debts and prevent the emergence of new ones. It is a regular international practice," said Bilous.
In addition to the obligations to pay the debt, the investor will have to modernize the company and maintain the environmental safety of the plant’s operations.
If all goes according to plan, the OPP can be sold as early as July, while 10 foreign buyers which have previously expressed an interest in purchasing the plant will provide for a worthy competition.
Fighting the overload
The story of the ban on overloaded trucks driving on motorways in several regions of Ukraine has gotten to a new round. Infrastructure Minister Volodymyr Omelian declared war against overloaded freight trucks, stressing that the vehicles with a load of more than 40 tonnes can’t drive on Ukrainian roads.
"The state is regaining control over the Ukrainian roads. The state does not introduce new rules for carriers – we demand compliance with the Ukrainian legislation, as the regulations determining maximum permissible load have long been adopted. Previously, the government turned a blind eye to this problem, the carriers transported goods whatever way they wanted, which led to the present situation with the roads. We are explaining to all of them: the vehicles with a load of more than 40 tonnes will not drive on the Ukrainian roads," the minister said.
Indeed, in October 2015, the Cabinet of Ministers banned the movement of trucks weighing more than 40 tonnes, but the authorities didn’t really enforce this rule.
The fact that the situation with the roads is critical is eloquently evidenced by the calculations of the Ministry of Infrastructure. The ministry says the overloaded trucks cause more than UAH 2 billion in loss annually, destroying the roads.
To fix the problem, the inspectors with special vehicle scales are now operating on the roads in Odesa, Mykolaiv and Kherson oblasts. At first, multi-kilometer traffic jams were formed on the roads due to the protests of trucks drivers against the introduction of load control. However, the conflict was resolved: the rallies died down soon and now the majority of drivers are now politely passing the control points, and in the case of overload, they pay fine on the spot and unload their trucks.
According to Omelyan, the fines imposed have already totaled about UAH 148,000. According to government estimates, at the initial phase, the fines for overloading will bring to the budget about UAH 400,000 per month.
Prime Minister Volodymyr Groysman last week inspected the load control checkpoints installed on the Odesa highway. He saw in person that the equipment is operational, and the majority of carriers have already admitted the need for this innovation.
But it’s also obvious that such measures are not enough, and carriers may rebel again, advocating for the lifting of load restrictions.
Another problem is traffic jams. Ukraine’s big grain trader Prometey reported that the new regime complicates passage to seaports in Mykolayiv region, and the exporters fail to deliver their goods to the ships on time, thus violating export contracts.
"A powerful stream of trucks today blocked the entrances to ports even for law-abiding carriers. As a result, the deadlines are compromised, and the exporters are forced to pay huge fines," the company said.
This situation doesn’t play in favor of the state budget. After all, it may encourage carriers to bribe inspectors for jumping the line or letting the trucks through without an actual load check.
Grain traders reported citing their partner carriers that some old schemes continue to operate on the Ukrainian roads.
It is obvious that to address this problem, legislative solutions are required. Several MPs have already registered in the Verkhovna Rada two bills aimed at protecting the roads of Ukraine from destruction by overloaded trucks.
Furthermore, it is necessary to increase the number of load inspection checkpoints to let the roads breathe.
According to Omelyan, of 34 available load checking systems, only 18 are operational. The government’s plan to increase their number to 105 units before year-end adds some optimism.
Oleksandra Danko (UNIAN)